REPORT TITLE:
College Savings


DESCRIPTION:
Amends chapter 256 to provide clear guidance for the
implementation of the college savings program and to bring
statute within the safe harbor provision of the federal tax code.
(HB2760 HD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2760
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE COLLEGE SAVINGS PROGRAM.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Section 256-1, Hawaii Revised Statutes, is
 
 2 amended as follows:
 
 3      1.  By adding a new definition to be appropriately inserted
 
 4 and to read:
 
 5      ""Eligible educational institution" means an institution
 
 6 defined in section 529 of the Internal Revenue Code of 1986, as
 
 7 amended, or successor legislation."
 
 8      2.  By amending the definitions of "account owner" and
 
 9 "nonqualified withdrawal" to read:
 
10      ""Account owner" means the individual who enters into a
 
11 tuition savings agreement pursuant to this chapter and as defined
 
12 under the [final regulations adopted by the Internal Revenue
 
13 Service.] proposed income tax regulations, sections 1.529-1
 
14 through 1.529-6 or the final regulations relating to section 529
 
15 of the Internal Revenue Code of 1986, as amended, whichever is
 
16 applicable, including any amendments or supplements thereto.
 
17      "Nonqualified withdrawal" means a withdrawal from an account
 
18 that is not:
 

 
Page 2                                                     2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (1)  [A qualified withdrawal;] Used for qualified higher
 
 2           education expenses of the designated beneficiary;
 
 3      (2)  [A withdrawal made as the result] Made on account of
 
 4           the death or disability of the designated beneficiary
 
 5           [of an account]; or
 
 6      (3)  [A withdrawal made] Made on the account of a
 
 7           scholarship[.], allowance, or payment described in
 
 8           section 135(d)(1)(B) or (C) of the Internal Revenue
 
 9           Code of 1986, as amended) received by the designated
 
10           beneficiary, to the extent the withdrawal does not
 
11           exceed the amount of the scholarship, allowance, or
 
12           payment."
 
13      3.  By deleting the definition "institution of higher
 
14 education".
 
15      [""Institution of higher education" means an institution
 
16 defined in section 529 of the Internal Revenue Code of 1986, as
 
17 amended, or successor legislation."]
 
18      SECTION 2.  Section 256-3, Hawaii Revised Statutes, is
 
19 amended to read as follows:
 
20      "§256-3  Functions and powers of the director of finance.
 
21 (a)  The director of finance shall implement the program under
 
22 the terms and conditions established by this chapter.  The
 
23 director of finance may make changes to the program as required
 

 
Page 3                                                     2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 for participants to obtain or maintain the federal [income] tax
 
 2 benefits or treatment provided by section 529 of the Internal
 
 3 Revenue Code of 1986, as amended, or successor legislation.
 
 4      (b)  The director of finance may enter into tuition savings
 
 5 agreements with account owners pursuant to this chapter.
 
 6     [(b)] (c)  The director of finance may implement the program
 
 7 through the use of financial organizations as account
 
 8 depositories and managers.  Under the program, individuals may
 
 9 establish accounts directly with an account depository.
 
10     [(c)] (d)  The director of finance may solicit proposals from
 
11 financial organizations to act as [depositories and managers of
 
12 the] program[.] managers.  Financial organizations submitting
 
13 proposals shall describe the investment [instrument] instruments
 
14 that will be held in accounts.  The director of finance shall
 
15 select as program [depositories and] managers the financial
 
16 organizations[,] from among the bidding financial organizations
 
17 that demonstrate the most advantageous combination, both to
 
18 potential program participants and this State, based on the
 
19 following factors:
 
20      (1)  The financial stability and integrity of the financial
 
21           organization;
 
22      (2)  The safety of the investment [instrument] instruments
 
23           being offered;
 

 
Page 4                                                     2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (3)  The ability of the investment [instrument] instruments
 
 2           to track the expected increasing costs of higher
 
 3           education;
 
 4      (4)  The ability of the financial organization to satisfy
 
 5           recordkeeping and reporting requirements;
 
 6      (5)  The financial organization's plan for promoting the
 
 7           program and the resources it is willing to allocate to
 
 8           promote the program;
 
 9      (6)  The fees, if any, proposed to be charged to persons for
 
10           opening accounts;
 
11      (7)  The minimum initial deposit and minimum contributions
 
12           that the financial organization will require;
 
13      (8)  The ability of financial organizations to accept
 
14           electronic withdrawals, including payroll deduction
 
15           plans; and
 
16      (9)  Other benefits to the State or its residents included
 
17           in the proposal, including fees payable to the State to
 
18           cover expenses to operate the program.
 
19     [(d)] (e)  The director of finance may enter into a
 
20 management contract of up to ten years with a financial
 
21 organization.  [The financial organization shall provide only one
 
22 type of investment instrument.]  The management contract shall
 
23 include, at a minimum, terms requiring the financial organization
 
24 to:
 

 
Page 5                                                     2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (1)  Take any action required to keep the program in
 
 2           compliance with requirements of section 256-4 and to
 
 3           manage the program to qualify it as a qualified state
 
 4           tuition plan under section 529 of the Internal Revenue
 
 5           Code of 1986, as amended, or successor legislation;
 
 6      (2)  Keep adequate records of each account, keep each
 
 7           account segregated from each other account, and provide
 
 8           the director of finance with the information necessary
 
 9           to prepare the statements required by section 256-4;
 
10      (3)  Compile information contained in statements required to
 
11           be prepared under section 256-4 and provide the
 
12           compilations to the director of finance;
 
13      (4)  If there is more than one program manager, provide the
 
14           director of finance with the information necessary to
 
15           determine compliance with section 256-4;
 
16      (5)  Provide the director of finance or designee access to
 
17           the books and records of the program manager to the
 
18           extent needed to determine compliance with the
 
19           contract;
 
20      (6)  Hold all accounts for the benefit of the account owner;
 
21      (7)  Be audited at least annually by a firm of independent
 
22           certified public accountants selected by the program
 
23           manager, and provide the results of the audit to the
 
24           director of finance; [and]
 

 
Page 6                                                     2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (8)  Provide the director of finance with copies of all
 
 2           regulatory filings and reports related to the program
 
 3           made by it during the term of the management contract
 
 4           or while it is holding any accounts, other than
 
 5           confidential filings or reports that will not become
 
 6           part of the program.  The program manager shall make
 
 7           available for review by the director of finance, the
 
 8           results of any periodic examination of the manager by
 
 9           any state or federal banking, insurance, or securities
 
10           commission, except to the extent that the report or
 
11           reports may not be disclosed under applicable law or
 
12           the rules of the commission[.]; and
 
13      (9)  Undertake to provide the information required by rule
 
14           15c2-12(b)(5) under the Securities Exchange Act of 1934
 
15           pursuant to a continuing disclosure certificate for the
 
16           benefit of the account owners.
 
17     [(e)] (f)  The director of finance may select more than one
 
18 financial organization and investment instrument for the program
 
19 [when the Internal Revenue Services has provided guidance that
 
20 giving a contributor the choice of two or more investment
 
21 instruments under a state program will not cause the program to
 
22 fail to qualify for favorable tax treatment under section 529 of
 
23 the Internal Revenue Code of 1986, as amended, or successor
 
24 legislation].
 

 
Page 7                                                     2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1     [(f)] (g)  The director of finance may require an audit to be
 
 2 conducted of the operations and financial position of the program
 
 3 [depository and] manager at any time if the director of finance
 
 4 has any reason to be concerned about the financial position, the
 
 5 recordkeeping practices, or the status of accounts of the program
 
 6 [depository or] manager.
 
 7      [(g)] (h)  During the term of any contract with a program
 
 8 manager, the director of finance shall conduct an examination of
 
 9 the manager and its handling of accounts.  The examination shall
 
10 be conducted at least biennially if the manager is not otherwise
 
11 subject to periodic examination by the commissioner of financial
 
12 institutions, the Federal Deposit Insurance Corporation, or other
 
13 similar entity.
 
14      [(h)  If selection of a financial organization as a program
 
15 manager or depository is not renewed, after the end of the term:
 
16      (1)  Accounts previously established and held in investment
 
17           instruments at the financial organization may be
 
18           terminated;
 
19      (2)  Additional contributions may be made to the accounts;
 
20      (3)  No new accounts may be placed with the financial
 
21           organization; and
 
22      (4)  Existing accounts held by the depository shall remain
 
23           subject to all oversight and reporting requirements
 
24           established by the director of finance.
 

 
Page 8                                                     2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 If the director of finance terminates a financial organization as
 
 2 a program manager or depository, the director of finance shall
 
 3 take custody of accounts held by the financial organization and
 
 4 shall seek to promptly transfer the accounts to another financial
 
 5 organization that is selected as a program manager or depository
 
 6 and into investment instruments as similar to the original
 
 7 instruments as possible.]
 
 8      (i)  The director of finance may establish a nominal fee for
 
 9 an application for a college account.
 
10      (j)  The director of finance may enter into contracts for
 
11 the services of consultants for rendering professional and
 
12 technical assistance and advice and any other contracts that are
 
13 necessary and proper for the implementation of the program.
 
14      (k)  The director of finance may adopt rules to implement
 
15 the program pursuant to chapter 91."
 
16      SECTION 3.  Section 256-4, Hawaii Revised Statutes, is
 
17 amended as follows:
 
18      "[[]§256-4[]]  Program requirements; college account.(a)
 
19 A college account may be opened by any person who desires to save
 
20 money for the payment of the qualified higher education expenses
 
21 on behalf of a designated beneficiary.  The person shall be
 
22 considered the account owner as defined in section 256-1.  An
 
23 application for an account shall be in the form prescribed by the
 
24 program and shall contain the following:
 

 
Page 9                                                     2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (1)  The name, address, and social security number or
 
 2           employer identification number of the account owner;
 
 3      (2)  The designation of a beneficiary;
 
 4      (3)  The name, address, and social security number of the
 
 5           designated beneficiary;
 
 6      (4)  A certification relating to no excess contributions;
 
 7           and
 
 8      (5)  Other information as the program may require.
 
 9      (b)  Only the account owner may make contributions to the
 
10 account after the account is opened.
 
11      (c)  Contributions to accounts may be made only in cash.
 
12      (d)  An account owner may withdraw all or part of the
 
13 balance from an account on sixty days' notice or a shorter period
 
14 as may be authorized under rules governing the program.  The
 
15 rules shall include provisions to generally enable the
 
16 determination of whether a withdrawal is a nonqualified
 
17 withdrawal or a qualified withdrawal.  The rules may require one
 
18 or more of the following:
 
19      (1)  An account owner seeking to make a qualified withdrawal
 
20           shall provide certifications of qualified higher
 
21           education expenses and other information required to
 
22           comply with section 529 of the Internal Revenue Code of
 
23           1986, as amended, or successor legislation;
 

 
Page 10                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (2)  Withdrawals not meeting the requirements of this
 
 2           section shall be treated as nonqualified withdrawals by
 
 3           the program manager, and if the withdrawals are
 
 4           subsequently deemed qualified withdrawals within a
 
 5           reasonable time period as specified by the director of
 
 6           finance, the account owner shall seek any refund of
 
 7           penalties directly from the program.
 
 8      (e)  An account owner may change the designated beneficiary
 
 9 of an account to an individual who is a member of the family of
 
10 the prior designated beneficiary.  An account owner may transfer
 
11 all or a portion of an account to another college account, the
 
12 designated beneficiary of which is a member of the same family,
 
13 as defined in section 529 of the Internal Revenue Code of 1986,
 
14 as amended, or successor legislation, as the beneficiary of the
 
15 initial account.  Changes in designated beneficiaries and
 
16 transfers under this section shall not be permitted if they
 
17 constitute excess contributions.
 
18      (f)  In the case of any nonqualified withdrawal from an
 
19 account, an amount equal to ten per cent (or that rate imposed
 
20 under final regulations adopted by the Internal Revenue Service)
 
21 of the portion of the withdrawal constituting income as
 
22 determined in accordance with the principles of section 529 of
 
23 the Internal Revenue Code of 1986, as amended, or successor
 

 
Page 11                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 legislation, shall be [withheld] collected as a penalty and paid
 
 2 to the college savings program trust fund as provided under
 
 3 section 529 of the Internal Revenue Code of 1986, as amended,
 
 4 successor legislation, or any guidance issued by the Internal
 
 5 Revenue Service.
 
 6      (g)  The percentage of the penalty described in subsection
 
 7 (f) may be increased if the director of finance determines that
 
 8 the amount of the penalty must be increased to constitute a
 
 9 greater than de minimis penalty for purposes of qualifying the
 
10 program as a qualified state tuition program under section 529 of
 
11 the Internal Revenue Code of 1986, as amended, or successor
 
12 legislation.
 
13      (h)  The percentage of the penalty described in subsection
 
14 (f) may be decreased by rule if it is determined that[:
 
15      (1)  The] the penalty is greater than the amount required to
 
16           constitute a greater than de minimis penalty for
 
17           purposes of qualifying the program as a qualified state
 
18           tuition program under section 529 of the Internal
 
19           Revenue Code of 1986, as amended, or successor
 
20           legislation[; and
 
21      (2)  The penalty, when combined with other revenue generated
 
22           under this chapter, is producing more revenue than is
 
23           required to cover the costs of operating the program
 
24           and recover any prior costs not previously recovered.
 

 
Page 12                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (i)  If an account owner makes a nonqualified withdrawal and
 
 2 no penalty amount is withheld pursuant to subsection (f), or the
 
 3 amount withheld was less than the amount required to be withheld
 
 4 under subsection (f) for nonqualified withdrawals, the account
 
 5 owner shall pay the unpaid portion of the penalty to the program.
 
 6 The unpaid portion shall be paid on the date that the account
 
 7 owner files the account owner's state or federal income tax
 
 8 return, whichever is filed earlier, for the taxable year of the
 
 9 withdrawal.  If the account owner does not file a return, the
 
10 unpaid portion shall be paid on the date that the earlier return
 
11 is due.  Authorized extensions to filing returns may be taken
 
12 into account in determining the date for paying the unpaid
 
13 portion].
 
14      [(j)] (i)  The program shall provide separate accounting for
 
15 each designated beneficiary.
 
16      [(k)] (j)  No account owner or designated beneficiary of any
 
17 account shall be permitted to direct the investment of any
 
18 contributions to an account or the earnings on it.
 
19      [(l)] (k)  Neither an account owner nor a designated
 
20 beneficiary shall use an interest in an account as security for a
 
21 loan.  Any pledge of an interest in an account shall be of no
 
22 force and effect.
 

 
 
 
Page 13                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      [(m)] (l)  Contributions on behalf of a designated
 
 2 beneficiary in excess of those necessary to provide for the
 
 3 qualified higher education expenses of the designated beneficiary
 
 4 shall not be allowed.  The prohibition on excess contributions
 
 5 shall conform to section 529 of the Internal Revenue Code of
 
 6 1986, as amended, or successor legislation.
 
 7      [(n)] (m)  If there is any distribution from an account to
 
 8 any individual or for the benefit of any individual during a
 
 9 calendar year, the distribution shall be reported to the Internal
 
10 Revenue Service and the account owner, the designated
 
11 beneficiary, or the distributee, to the extent required by
 
12 federal law or regulation.
 
13      Statements shall be provided to each account owner at least
 
14 once each year within sixty days after the end of the
 
15 twelve-month period to which they relate.  The statement shall
 
16 identify the contributions made during a preceding twelve-month
 
17 period, the total contributions made to the account through the
 
18 end of the period, the value of the account at the end of the
 
19 period, distributions made during the period, and any other
 
20 information that the director of finance requires to be reported
 
21 to the account owner.
 
22      Statements and information relating to accounts shall be
 
23 prepared and filed to the extent required by federal and state
 
24 tax law.
 

 
Page 14                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      [(o)] (n)  A local government or organization described in
 
 2 section 501(c)(3) of the Internal Revenue Code of 1986, as
 
 3 amended, or successor legislation, may open and become the
 
 4 account owner of an account to fund scholarships for persons
 
 5 whose [[]identity[]] shall be determined upon disbursement.  Any
 
 6 account opened pursuant to this subsection is not required to
 
 7 comply with the condition set forth in subsection (a) that a
 
 8 beneficiary be designated when an account is opened, and each
 
 9 individual who receives an interest in the account as a
 
10 scholarship shall be treated as a designated beneficiary.
 
11      [(p)] (o)  An annual fee may be imposed upon the account
 
12 owner for the maintenance of the account.
 
13      [(q)] (p)  [A qualified withdrawal may be made only after at
 
14 least three calendar years have elapsed from the time an account
 
15 is opened.]  A minimum length of time as determined by the
 
16 director of finance may be required of the account before
 
17 distributions for qualified higher education expenses can be
 
18 made.
 
19      [(r)] (q)  The program shall disclose in writing the
 
20 following information to each account owner and prospective
 
21 account owner of a college account:
 
22      (1)  The terms and conditions for purchasing a college
 
23           account;
 

 
Page 15                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (2)  Any restrictions on the substitution of beneficiaries;
 
 2      (3)  The person or entity entitled to terminate the tuition
 
 3           savings agreement;
 
 4      (4)  The period of time during which a beneficiary may
 
 5           receive benefits under the tuition savings agreement;
 
 6      (5)  The terms and conditions under which money may be
 
 7           wholly or partially withdrawn from the program,
 
 8           including any reasonable charges and fees that may be
 
 9           imposed for withdrawal; and
 
10      (6)  The probable tax consequences associated with
 
11           contributions to and distributions from accounts."
 
12      SECTION 4.  Section 256-5, Hawaii Revised Statutes, is
 
13 amended by amending subsection (b) to read as follows:
 
14      "(b)  Nothing in this chapter shall create or be construed
 
15 to create any obligation of the director of finance, the State,
 
16 or any agency or instrumentality of the State to guarantee for
 
17 the benefit of any account owner or designated beneficiary with
 
18 respect to:
 
19      (1)  The rate of interest or other return on any account;
 
20           [or]
 
21      (2)  The payment of interest or other return on any
 
22           account[.]; or
 

 
 
 
Page 16                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (3)  The repayment of the principal of any account.
 
 2 The director of finance shall provide by rule that every tuition
 
 3 savings agreement, contract, application, deposit slip, or other
 
 4 similar document that may be used in connection with a
 
 5 contribution to an account clearly indicate that the account is
 
 6 not insured by the State and neither the principal deposited nor
 
 7 the investment return is guaranteed by the State."
 
 8      SECTION 5.  Section 256-6, Hawaii Revised Statutes, is
 
 9 amended to read as follows:
 
10      "§256-6  College savings program trust fund.(a)  There is
 
11 established the college savings program trust fund.  The director
 
12 of finance shall have custody of the fund.  All payments from the
 
13 fund shall be made in accordance with this chapter.
 
14      (b)  The fund shall consist of a trust account and an
 
15 operating account.  The trust account shall include amounts
 
16 received by the college savings program pursuant to tuition
 
17 savings agreements, administrative charges, fees, and all other
 
18 amounts received by the program from other sources, and interest
 
19 and investment income earned by the fund.  The director of
 
20 finance, from time to time, shall make transfers from the trust
 
21 account to the operating account for the immediate payment of
 
22 obligations under tuition savings agreements, operating expenses,
 
23 and administrative costs of the college savings program.
 

 
Page 17                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 [Administrative costs shall be paid out of the operating
 
 2 account.]
 
 3      (c)  The director of finance, as trustee, shall invest the
 
 4 assets of the fund in securities that constitute legal
 
 5 investments under State laws relating to the investment of trust
 
 6 fund assets by trust companies, including those authorized by
 
 7 article 8 of chapter 412.  Trust fund assets shall be kept
 
 8 separate and shall not be commingled with other assets, except as
 
 9 provided in this chapter.  The director of finance may enter into
 
10 contracts to provide for investment advice and management,
 
11 custodial services, and other professional services for the
 
12 administration and investment of the program.  [Administrative
 
13 fees, costs, and expenses, including investment fees and
 
14 expenses, shall be paid from the assets of the fund.]
 
15      (d)  The director of finance shall provide for the
 
16 administration of the fund, including maintaining participant
 
17 records and accounts, and providing annual audited reports.  The
 
18 director of finance may enter into contracts for administrative
 
19 services, including reports.
 
20      (e)  All administrative fees, costs, and expenses, including
 
21 investment fees and expenses, shall be paid from the operating
 
22 account of the fund and, notwithstanding any law to the contrary,
 
23 may be paid without appropriation or allotment."
 

 
Page 18                                                    2760
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      SECTION 6.  Statutory material to be repealed is bracketed.
 
 2 New statutory material is underscored.
 
 3      SECTION 7.  This Act shall take effect upon its approval and
 
 4 shall apply to taxable years beginning after December 31, 1999.